REALISATION OF ASSETS IN RELATION TO PARTNERSHIPS
Assuming that the official receiver has an order to deal with the winding-up of a partnership (or its business) then the principles relating to the realisation of assets is largely the same as for a company in liquidation and the advice elsewhere in the Technical Manual may be followed.
There are, though some areas where specific guidance is useful, and that guidance is contained in this Part, as follows:
Where the official receiver is dealing with only the partnership, or only a partner, it will be necessary to establish what property belongs to the partnership and what property belongs, separately, to the partners.
The Partnership Act provides no definition of partnership property and matters are largely decided by case law. Generally speaking, it is left up to the partners to agree what is (and what is not) partnership property [note 1]. In the absence of any partnership agreement specifying the division of assets and profits on dissolution of the partnership(see Part 3), the following will taken into account [note 2]:
Where goodwill is generated by a partnership, that goodwill will clearly be an asset of the partnership [note 4]. If the partnership was formed to continue an existing business then the position is less clear cut and the partner(s) who introduced the existing business may have a greater claim over the goodwill.
In an compulsory insolvency the sale of goodwill is rare as by that stage the goodwill will often have no value. Advice on dealing with goodwill is contained in paragraphs 31.10.83 to 31.10.85.
Partners are liable for the debts of the partnership, and if the official receiver is dealing with the insolvency of a partnership, and no order is made against any or all of the partners, they may be called upon to meet partnership liabilities.
Where the official receiver has established that a ‘solvent’ partner (i.e., a partner that is not subject to formal insolvency proceedings) has a liability to contribute to the debts of the partnership. he/she should instruct Moon Beever to deal with the matter (see Chapter 31.4A, Part 1) after settling the list (see paragraphs 58.16 to 58.20). This may extend to a retired partner (see paragraph 53.78).
Where the partners are subject to insolvency proceedings their obligations as contributories are liabilities of the insolvency proceedings. The official receiver, as liquidator or trustee of the partnership should lodge a proof of debt in the separate proceedings for the amount which comprises the deficiency of assets over liabilities of the partnership. Where the partnership creditors have been listed separately, the details should be removed from the separate estate and replaced by the official receiver’s claim.
When a bankruptcy order is made against a member of a partnership and, as a result, the partnership is dissolved (see paragraph 53.88), it will be necessary to take an account (see paragraph 53.146) of the partnership in order that the trustee can claim his/her share of the partnership.
The solvent partner(s) should be requested to carry out the process of taking the account of the partnership and to then account to the official receiver, as trustee, for the value of the partnership [note 4a], providing the evidence from the last accounts prepared and the books and papers of the partnership etc.
Generally, the taking of the account will be left to the ‘solvent’ partners to deal with, but the general principle is:
Where there is a dispute over the taking of the account, it is possible that the official receiver, as trustee, will have to employ an accountant to assist in resolving matters. Where the employment of an accountant is being considered the official receiver should take into consideration the costs and benefits of doing so and should only do so where it is likely to be beneficial to the estate.
Generally, the costs of taking the account should be paid out of the assets of the partnership [note 5].
Where the official receiver has information that the bankrupt’s interest in the partnership is small and would be outweighed by the costs of seeking a formal taking of the account, he/she may come to an ‘informal’ arrangement with the other partners for the sale of the bankrupt’s interest.
Whilst, strictly speaking, the sale of an interest in the partnership should be conducted under deed (requiring the employment of solicitors – for which the fees should be paid by the purchaser), the official receiver may conduct the sale by an exchange of letters. The official receiver should, in this respect, ensure that his/her letter confirms that the offer is accepted as full and final settlement of any claims in respect of the partnership business.
It has been held that a forfeiture clause in a partnership agreement, whereby the bankrupt partner’s share is forfeit to the other partners on bankruptcy, may be a fraud on bankruptcy law. Any attempts to rely on the existence of such a clause should be resisted [note 6].
In practical terms, the official receiver is likely to find it necessary to appoint solicitors to deal with such a matter, if agreement cannot be reached with the partners. In deciding whether to appoint solicitors, the official receiver should consider the likely costs and the benefit to the estate in doing so, seeking guidance from Technical Section as required.
The Partnership Act does not provide for a partnership to be automatically dissolved on the making of a winding up order against one of its corporate members, though this may be grounds for winding-up the partnership [note 7] (see paragraph 45.188). A partnership agreement (see Part 3) may provide how the partner’s interest in the partnership should be valued and paid out. It is possible that the agreement may provide that on the winding up of a member the share of the partnership attributable to the relevant corporate partner will be divided between the remaining partners. Such a provision may be rendered void [note 8], but if all the corporate partners were solvent at the time the agreement was entered into and there was proven commercial justification for its inclusion, then it may be binding.
In the event that this situation is encountered, the official receiver should obtain a copy of the agreement and copies of the accounts of the corporate members. Creditors should be informed of the position and be given an opportunity to fund the obtaining of legal advice and/or the nomination of an insolvency practitioner liquidator to enquire into the matter. As a general rule, where a winding up order is made against a corporate partner, the official receiver should request the solvent partner(s) to buy the company’s interest in the partnership (see paragraph 53.146)
Partnership agreements (see Part 3) sometimes contain clauses that, where a partnership is dissolved, a surviving (solvent, in this context) partner may purchase the bankrupt partner’s share at a pre-arranged price. Where this is considered to be a fraud upon the bankruptcy creditors, the court may order the sale of partnership assets to ensure that the creditors are not disadvantaged [note 9]. Such a challenge would constitute an antecedent recovery and the advice in Chapter 31.4B may be followed.
It is open to the ex-partners of a dissolved partnership to continue the business of the partnership, even using the name, providing he/she does not hold out that the other partners are still partners with him/her. In an insolvency case, it is likely that it will be the solvent partner(s) who wish to carry on the business. In such a case, the official receiver should satisfy him/herself that the new business is not using assets that formed part of the partnership property or, if such assets are being used, that they were accounted for when calculating the bankrupt’s share in the dissolution of the partnership (see paragraph 53.144).
Where the partnership business is continued without any financial settlement, the departing partner is entitled to such share of the profits as the court may find attributable to his/her share of the partnership assets or, alternatively, 5% per annum on the amount of his/her share [note 10].
Where bankruptcy orders have been made against all partners but no order has been made against the partnership there could be difficulties in dealing with the administration of the estate as, although the partnership will have been dissolved (see paragraph 53.88), there will be no ‘solvent’ partner to deal with the dissolution of the partnership (see paragraph 53.146). The official receiver as trustee will not be able to deal with the partnership property (see paragraph 53.122). The legal position is that partnership property effectively forms a trust in favour of the partnership creditors and thus does not form part of a bankrupt’s estate capable of vesting in a trustee. The official receiver should consider applying to court for an order giving him/her power to deal with the partnership property (see paragraph 53.154).
Where bankruptcy orders have been made against all partners but there has been no concurrent order against the partnership the official should not deal with partnership property as he/she has no authority to do so (there being no winding-up order against the partnership). The correct course to follow in this circumstance is outlined in paragraph 53.154.
See paragraph 53.123 for advice where official receiver mistakenly deals with partnership property when he/she has no authority to do so.
Where bankruptcy orders are made against all partners with no order being made to deal with the partnership , assuming there is no pending petition against the partnership (in which case the official receiver should await the outcome of that petition), the official receiver can make an application to court (see paragraph 53.155) [note 11] for an order that:
See paragraph 53.144 for guidance where at least one member remains solvent (i.e., not subject to a bankruptcy order).
It would not normally be appropriate to seek an order to deal with the partnership (see paragraph 53.154) if there were no partnership assets.
As an alternative to the process outlined at paragraph 53.154, the official receiver could seek a winding-up order against the partnership [note 15]. This course of action is almost always unjustified and, unless the process outlined at paragraph 53.154 cannot be followed and the partnership has sufficient assets to cover the costs of the application, such a course should not be followed.
For the avoidance of doubt, the authority of partners of a partnership to deal with partnership property ends on the making of a winding-up order against the partnership (whether or not there are concurrent petitions/orders against the partners) and they are under a duty to deliver up property to the official receiver as liquidator [note 16] [note 17] [note 18].
Property of a partnership cannot be considered as exempt property in the bankruptcy of an individual member (see paragraphs 31.2.18 and 30.22). There is no provision in the liquidation proceedings for exempt property.
As outlined in paragraph 53.52, there are certain circumstances where a limited partner will be liable to contribute to the debts of the partnership in excess of his/her original contribution.
In this regard, the official receiver’s investigations should seek to establish whether the limited partner(s) had any involvement in the running of this business to decide whether he/she may be liable for the debts of the partnership along with the general (non-limited) partners [note 19]. The official receiver may find the guidance in Chapter 32 of the Enforcement Investigation Guide useful in this regard.
Establishing the date of the limited partner’s commencement of involvement in the management of the partnership is also important as it is from this date that he/she would be liable for the debts of the partnership.
If it can be established that a limited partner has a liability to contribute to the debts of a partnership (see paragraph 53.160), the official receiver should seek the appointment of Moon Beever (see Chapter 31.1, Part 2) as this is, effectively, a book debt.
[Back to Part 7 – Practical issues relating to the administration of insolvent partnerships]